Sean Pong: TUPE throws up a stinker
Every so often TUPE can throw up a real stinker of a conundrum. Sean Pong Tyres Ltd v Moore [2024] EAT 1 is aptly named.
Overview
TUPE is supposed to preserve rights on a transfer. But its mechanisms start to breakdown where there are interconnected rights as between two colleagues (a claimant and perpetrator), only one of whom transfers, and as between each of them and the transferor employer. A standard application of TUPE could cause havoc. Before the transfer the transferor may have a liability to the claimant and a right in tort or contract to recover that loss from the perpetrator. But after the transfer, a standard application of TUPE could result in the transferee having a liability to the claimant and no right to recover from the perpetrator, and a transferor with a claim in damages but suffering no loss. Or on transfer of the perpetrator it could leave the transferor with the liability to the claimant but with no claim against the perpetrator, and the transferor with a claim against the perpetrator but no loss. Sean Pong is the latest case to try to tackle the conundrum, following Doane v Wimbledon FC and Sohail v WFS.
The conundrum: splitting a package of rights
At the heart of TUPE protection is the transfer of rights and liabilities under or in connection with the contract of employment of any employee who transfers (or would have done but for being dismissed by reason of the transfer): reg 4(2)(a). Closely connected with this is the principle that any act or omission before the transfer of, or in relation to, the transferor in respect of a person assigned to the transferring entity or their employment contract is deemed to have been an act or omission of or in relation to the transferee (reg 4(2)(b) ERA.
Sometimes those rights form part of bundle of connected rights. That is particularly likely to be the case where the worker has rights against the employer (at common law or under statute) arising from something done by a colleague (the perpetrator), such as a claim for unlawful discrimination or harassment under the Equality Act 2010 (“EqA”) or detriment on the grounds of a protected disclosure. If the claim succeeds it is likely to follow that the perpetrator was in breach of contract to the employer. Indeed the employer might not only want to terminate the contract on grounds of repudiatory breach, but also to bring a damages claim to recover the loss incurred to the claimant worker.
All that depends on the same employer being both liable to the claimant and able to recover from the perpetrator. And then along comes TUPE.
Suppose the claimant worker and the perpetrator work in two different departments, say Logistics and Marketing. The perpetrator transfers to a new employer (Transferee 1) on a transfer of the Logistics business. The claimant works in Marketing and stays put. Before the transfer the claimant is subjected to unlawful harassment related to race for which the transferor employer is liable under the EqA. The claimant succeeds in the tribunal against the Transferor employer, who then wants to records that loss from the perpetrator. However all the rights and liabilities of the perpetrator have transferred to the transferee. In addition the conduct of the employee pre-transfer in relation to the transferor, including (at least on an orthodox interpretation) the conduct in acting in a way that amounts to a breach of duty to the transferor by harassing a colleague, are treated as having been done in relation to the transferee. Indeed the transferee may want to exercise the right to terminate the conduct for repudiatory breach. But the transferee cannot recover in relation to the sums awarded to the claimant worker because that is loss sustained by the transferor.
The same and opposite problem arises if the perpetrator stays put and the claimant worker transfers (to Transferee 2). The claimant’s claim then transfers resulting in liability of Transferee 2. Indeed aside from the transfer of rights and liabilities under reg 4(2)(a) TUPE, the effect of reg 4(2)(b) will be to result in liability of Transferee 2, since under s.109 EqA, the acts of harassment in the course of employment by the perpetrator in the course of employment are treated as having been done by the employer. The same would apply in relation to protected disclosure detriment under s.47B(1B) ERA. But if the claim as between the transferor and the perpetrator does not transfer because the perpetrator is not assigned to the entity which transfers, Transferee 2 suffers the loss in relation to the claimant, but has no right to recover against the perpetrator. Meanwhile the transferor has the claim against the perpetrator but does not suffer the loss.
The dilemma is reinforced if both the claimant and the perpetrator transfer. The liability to the claimant transfers at least to Transferee 2. That is so even if the perpetrator transfers first and it could be said that the transferors’ liabilities to the claimant transferred with the perpetrator to Transferee 1, if the conduct of the transferor is attributed to the Transferee 2 under reg 4(2)(b). Equally on an orthodox analysis, the liability of the perpetrator to the transferor will transfer to Transferee 1, at least by virtue of reg 4(2)(b) even if an earlier transfer of the claimant could be said to impact on what rights or liabilities are left to transfer under reg 4(2)(a).
Of course the claimant might bring the claim directly against the perpetrator (as well as or instead of the employer) and could then seek to enforce it against the perpetrator. But there is no obligation to do so.
Essentially TUPE splits the atom and causes an almighty explosion, where the claimant’s right to claim against the employer, and an employer’s right to recover the loss land up in the wrong place.
TUPE is not supposed to have that effect. Aside from the worker protection objective, one of the key guiding principles is that it is concerned with safeguarding rights, not improving the position of the parties to the transfer: see eg Procter & Gamble Co v Svenska Cellulosa Aktiebolaget SCA [2012] IRLR 733 (Ch) at [44]. It should not have the effect that a perpetrator, who prior to a transfer has a liability to the employer for damages arising from loss caused by tortious or contractual breach of duty, is in substance relieved on that liability because the transferee employer does not suffer the loss. That is also contrary to the principle recognised in Alemo-Herron v Parkwood Leisure Limited Case C-426/11 [2013] IICR 1116 (CJEU) that TUPE should achieve a fair balance between the interests of the worker and transferee.
Doane v Wimbledon Football Club and Milton Keynes Dons
The decision in Sean Pong is the third in a trio of decisions in which the conundrum has arisen. The first was in Doane v Wimbledon Football Club Ltd and others [2007] 12 WLUK 2 CC (Sheffield County Court). Ben Doane had been playing for Sheffield United FC when he was injured in a tackle by a Wimbledon player, Darren Holloway. He brought a claim in tort against Mr Holloway. There was a TUPE transfer when Wimbledon FC became Milton Keynes Dons. HH Judge Robinson rejected an argument that since Mr Doane was outside the scope of TUPE protection; since it does not protect an employee who is not assigned to the entity transferred it should not protect a third party who is even more remote having never been employed by the transferor. He concluded that vicarious liability for the acts of Mr Holloway (if liability was to be established) did transfer on the basis of being connected with Mr Hollway’s contract. He regarded this as consistent with the aim of protecting employees of the transferor at the time of the transfer, since the employee alleged to be liable in tort may benefit from his employer “taking care of all matters pertaining to the defence of any claim arising out of negligence related to his employment”. This may include arranging legal representation, undertaking the defence of any clam and indemnifying him against any liability. However (as was argued) far from there being an indemnity, it may be the employee who is obliged to compensate a vicariously liable employer for loss arising out of the employee’s negligence: Lister v Romford Ice and Cold Storage Co Ltd [1957] A.C. 555 HL).
On the facts in Doane the solution reached may have been regarded as attractive because Wimbledon FC was insolvent and, since the claim was by a third party rather than by a fellow employee of the transferor, it did not directly raise the issue of splitting the liability to the claimant from the claim against the perpetrator upon the transfer. Both would rest with the transferee on the facts. But a problem lay in its implications of the conclusion that vicarious liability transferred for a case where the claimant was a fellow employee of the transferor.
Sohail v WFS Handling Services Ltd
That issue did arise directly in Sohail v WFS Handling Services Ltd UKEAT/0288/17 DM, 14 March 2019. Whereas in Doane, the effect of finding that there was no transfer of liabilities would have been to leave a claim only against an insolvent transferor, Sohail focussed attention on some of the problems of transferring vicarious liability. Ms Sohail, the claimant, was employed as a passenger service agent by Premier. She was assigned to work for WFS, and was a contract worker for WFS within the meaning of s.41 of the Equality Act 2010. She claimed that during the three months that she worked for WFS she was subjected to treatment by four employees of WFS amounting to direct race or religious discrimination or harassment related to race or religion. Of the four employees, two transferred under TUPE to ASIG, one transferred under TUPE to Swissport, and one remained with WFS. At a preliminary hearing the ET concluded that TUPE did not have the effect of transferring vicarious liability for the perpetrator employees who transferred. EJ Franey emphasised that if there was a transfer of liability when the perpetrators transferred, it would have the effect that the claimant would lose the right to claim against her employer (or in this case the principal in a contract worker relationship). Indeed, this could have the consequence that the non-transferring employee claimant might not have clarity as to which employer was to be liable for her claim, given that the information and consultation provisions of TUPE are directed only at informing affected employees. That might in turn make enforcement of the rights more difficult. Adopting a purposive approach, EJ Franey concluded that reg.4(2)(a) was to be read such that the only liabilities transferred were those “owed to the person transferred”, and not liabilities owed to third parties or to employees who did not transfer. This was reconciled with the decision in Bernadone v Pall Mall Services Group Ltd [2001] ICR 197 (CA).(where public liability insurance transferred alongside liability in tort), on the basis that this still related to a right to claim an indemnity in respect of a liability of the transferor to the transferring employee. Otherwise the effect would be to impact on employees who are not caught by the transfer, by divesting them of their rights prior to the transfer (whether under statute in Sohail, or a contractual or tortious duty of care in a negligence case such as Doane).
The solution adopted however begged a question as to the effect of TUPE on the employer’s right to claim damages against the perpetrators for their breach of contract in subjecting the claimant to the alleged discrimination and harassment. If that transferred to the transferees, but as the tribunal found vicarious liability remained with the transferor, TUPE would leave the transferor divested of a remedy, and the transferee with a claim but no loss. Sadly, although the EAT upheld the decision, there is no transcript of its reasons.
Sean Pong Tyres Ltd v Moore
And so into the ring stepped the EAT in Sean Pong. Tyres Ltd v Moore. The ET had upheld the claimant’s claim of constructive unfair dismissal and harassment related to age and race. The claim were founded on the conduct of a colleague (X) of the claimant. The respondent had sought to amend the defence to contend that because X’s employment had transferred to another employer (Y), liability for the claims had also transferred. The ET refused permission to amend. In the EAT Judge Stout found that ET had erred in its approach to amendment, but that this was not material because liability did not transfer for either claim.
There was no transfer of the employer’s unfair dismissal liability to the claimant because his employment had terminated prior to the transfer to Y and this was not by reason of the transfer. The mere fact that the liability arose from the conduct of X was not a sufficient connection to amount to a liability in connection with X’s employment contract. As to liability for harassment under the EqA, Judge Stout emphasised that the term “connected with” can have a narrower or wider meaning depending on the context. She noted that in all cases except Bernadone the right or liability had arisen in relation to a right or liability owed by one party to the employee’s contract against the other, albeit sometimes in tort rather than contract. Whilst Bernadone, by contrast, was a right and liability under a third party contract, there were strong policy considerations that had pushed the Court of Appeal towards the conclusion that the insurance indemnity transferred (essentially based on the inter-connectedness of the rights concerned). She also noted that it was not sufficient merely for the in scope employee, such as the perpetrator, to have had something to do with the liability incurred. Thus, where an employer had a commercial liability to a third party, the mere fact that it was brought about by some conduct of an employee would plainly not be sufficient for the liability to transfer. The same applied to the employer’s primary liability under the EqA, which she concluded is only to be regarded as in connection with the claimant’s employment contract.
The EAT added (at [32(i)]) that this approach had the merit of construing reg 4(2)(a) TUPE consistently with reg 4(2)(b). Like the ET in Sohail, the EAT noted that where there were acts of discrimination of harassment against the claimant, those were acts or omissions of the transferor (under s.109 EqA). As such on transfer they would be treated as done by the transferee. That would be in tension with the liability also or instead transferring to a different transferee to whom the perpetrator transferred.
The EAT acknowledged the issues that may arise as to the treatment of inter-connected rights. As Judge Stout put it (at [32(g)]:
“The underlying purpose of TUPE … is for the complex of rights and obligations connected with a transferring employee’s contract to transfer with that employee to the transferee. If there are rights and liabilities genuinely and properly connected with the tortfeasor employee’s contract, those should transfer as HHJ Robinson held in Doane. However, it is no part of the purpose of TUPE for the complex of rights and obligations in connection with a non-transferring employee to transfer to the transferee. Quite the opposite, as is clear from the well-established position in relation to liability for unfair dismissal …”.
It is here thought that aspects of the EAT’s analysis becomes problematic. The EAT distinguished the approach in Doaneon the basis that at common law the employee might have claim to a contribution under s.1 of the Civil Liability (Contribution) Act 1978. That (contingent) liability to the employer would arise in connection with the perpetrator’s employment contract and as such would transfer to the transferee if the perpetrator’s employment transferred under TUPE. If the claim against the employee did not transfer, there would therefore be a divergence between the two claims. The EAT noted that by contrast, the decision in Sunderland City Council v Brennan [2013] ICR 1183 (EAT) is authority for there being no such right to claim a contribution in relation to a claim under the EqA. The EAT concluded that there was therefore no “package of rights and liabilities” belonging to the tortfeasor employee that the tortfeasor employer had an interest in transferring to the transferee employer, and therefore no policy reason for straining what the EAT regarded as being the natural interpretation of TUPE to apply it beyond rights and liabilities directly between the transferor and in scope employee.
There are however two problems with that analysis. One was acknowledged by the EAT itself. The authority to the effect that there cannot be a contribution claim under the 1978 Act in relation to a liability in the tribunal is at least questionable in the light of the reasoning in Irwell Insurance Co. Ltd v Watson and another [2021] ICR 1034 (CA).
But secondly, aside from the 1978 Act, ordinarily there is likely to be a direct claim for breach of contract arising from the perpetrator’s conduct in the course of employment in subjecting a colleague to unlawful discrimination and harassment. That is a liability arising squarely under the perpetrator’s contract and so (absent a highly purposive construction) would transfer to the transferee in the event that the perpetrator transfers (under reg 4(2)(a) and/or reg 4(2)(b)). That in turn gives rise to the mismatch between where the liability to the claimant remains (on the EAT’s analysis) and to where the breach of contract claim against the perpetrator relocates.
In Sean Pong the EAT suggested (at [32(f)]) that if the 1978 Act applied, so that a tortfeasor employer had a package of rights that, construing TUPE purposively, ought to transfer to the new employer, this would only mean that the transferor employer’s vicarious liability should transfer to the transferee employer, but did not mean that the transferor’s primary liability should also transfer. That however is also problematic. It would not provide a solution to the splitting of rights unless the right to an indemnity/ contribution/ damages claim both passed to the transferee taking on the perpetrator (to whom on this analysis the vicarious liability would pass) but also remained with the transferor (on the basis that primary liability does not pass). Both would be needed since the claimant could choose against whom to bring the claim. But in any event, where liability arises on the basis of attributing the conduct of the perpetrator employee to the employer under s.109 EqA, there is no separate vicarious and primary liability to be split[1]. As such for the transferor and transferee both to retain liability would be inconsistent with authority that the liability of the transferor is extinguished on transfer to the transferee (Stirling DC v Allan [1995] IRLR 301 CSIH),
A solution to the conundrum?
In all, the suggested alternative approach in Sean Pong where two employers could be liable post transfer, is an unlikely solution which fits poorly with the approach under TUPE of extinguishing liability on a transfer. Having concluded in Sean Pong that, aside from the bundle of rights issue, liability would not transfer with the perpetrator, the focus on a purposive approach is better placed on the connected rights following that liability. That is best achieved in part by adopting part of the reasoning in Sean Pong, in support of the conclusion that vicarious liability of the perpetrator does not entail a sufficient connection with the perpetrator’s contract as to be regarded as arising under or in connection with that contract. That partially avoids a split in the liability, given that upon a transfer of the claimant to a different transferee, reg 4(2)(b) would in any event entail that the discriminatory conduct would be attributed to that transferee.
However to avoid a divergence in the pre-transfer bundle of rights, it is also important that any claims that the transferor had (contingent or actual) to claim damages against the perpetrator for loss arising from the vicarious liability, does not transfer to the perpetrator’s transferee, and would instead remain with the same employer who bears vicarious liability (either the transferor or, in the event of a transfer affecting the claimant, the claimant’s transferee). In so far as there is a right to for the transferor to claim a contribution or indemnity under the 1978 Act, that must be regarded as connected, or primarily connected to the claimant’s contract of employment, because the need for it arises by reason of the claimant’s claim arising in connection with that contract. Otherwise the claimant’s transferee would be in a worse position than the transferor, contravening the fundamental principle that TUPE is concerned with safeguarding rights but no more.
Most problematic however is the right which the transferor has pre-transfer to claim damages for breach of contract in relation to the perpetrator’s conduct, giving rise to vicarious liability (in tort or under statute). On its face that falls squarely as being something that would be a liability under the contract that would transfer to the perpetrator’s transferee, rather than the claimant’s transferee. Certainly at least the transferee must at least have the right to rely on the perpetrator’s conduct as being a basis to terminate the employment contract for repudiatory breach. But a highly purposive construction is required such that, solely to the extent required to claim damages for the vicarious liability, the right does not transfer to the perpetrator’s transferee and would instead remain bound together with the vicarious liability, either with the transferor or, in the event of a TUPE transfer affecting the claimant, to that transferee.
Jeremy Lewis KC
Jeremy edits “Transfer of Undertakings” (Sweet & Maxwell). The next update will be released in April 2024, and is a bumper edition, including coverage of the impact on TUPE of the EU (Reform and Revocation) Act 2023, the reform of the small employer exception for information and consultation and caselaw developments including Sean Pong.
[1] The position may arguably be otherwise if there could be a claim arising also without need to rely on the provision to attribution to the employer conduct in the course of employment: see by comparison the alternative routes under s.47B(1) and (1A) ERA in relation to detriment for making protected disclosures.
